A rendering of an amenity space at Latitude, a two-building, 700,000-square-foot office campus in Parsippany owned by Vision Real Estate Partners and Rubenstein Properties LP — Courtesy: Vision Real Estate Partners/Nelson
By Joshua Burd
In a region where more than half of the office buildings were built before 1990, so-called Class A space may no longer signify the highest tier of the market.
Such is the case in northern and central New Jersey, as confirmed in a recent study by JLL. The real estate services firm found that some two-thirds of the buildings that are categorized as Class A have not been significantly renovated during their lifespan, drawing a major distinction between those assets and those that have seen major capital improvements.
The latter group, which JLL has carved out as “Premier Class A” properties, boasts vacancy rates that are 4 percentage points lower than in Class A buildings that have not been substantially upgraded. What’s more, Premier Class A buildings commanded rents that were $34.68 per square foot at the time of the study, nearly 20 percent higher than their Class A peers.
“I think that probably opened a lot of eyes when you remove those older buildings that are kind of weighing on the market,” said Steve Jenco, JLL’s vice president for suburban tristate research. “That’s been the story in our market for the past several years now and the numbers really don’t tell the story, because we have a market that was mostly developed in the 1980s.”
Tim Greiner, an executive managing director with the firm, said the analysis was borne out of two recent transactions that showed the disparity among Class A buildings. In one case, JLL was representing Sax LLP in its search for a new headquarters, as the accounting firm sought a high-quality, upgraded building in Morris County with abundant amenities and strong ownership.
The selection was unexpectedly limited — at least, for a market with so much availability.
“We really couldn’t find a 40,000-foot block that they loved, other than a handful of options,” Greiner said. “And it really made me think that these 30 percent vacancy numbers just don’t really tell a story.”
The resulting study found that Premier Class A space totals nearly 39.4 million square feet in northern and central New Jersey, accounting for less than 40 percent of the overall Class A office stock. Vacancy in the highest-end segment of the market was 18.1 percent, JLL said, versus 22 percent in other Class A buildings.
Perhaps most staggering were the results in Parsippany, where Premier Class A vacancy was only 11.5 percent. In all other Class A buildings in the submarket, vacancy totaled 31.5 percent.
“We put some pretty hard criteria about what defines renovations because there could be some gray areas there,” Jenco said. “If you update a lobby, does that count as a renovation? Well, not really. There’s got to be more to it than that, so you really have to dive in to say what buildings have really been extensively renovated.”
The numbers reaffirm the advantage gained by landlords who make a major investment, the kind that goes beyond simply cosmetic enhancements. According to Greiner and Jenco, that includes new amenity spaces, updated infrastructure and expanded outdoor spaces.
The investments have proved fruitful, as nearly 70 percent of leases greater than 50,000 square feet signed during the past year were concentrated in Premier Class A buildings, JLL found.
“We’ve had the conversation with a lot of potential investors in northern New Jersey over the past couple months and they all get it,” Greiner said. “Once you put the data in front of them, it opens their eyes that maybe New Jersey is a place where you should invest in suburban office space.”
Tenants will undoubtedly be drawn to newly built or renovated buildings in the wake of COVID-19, especially those with upgraded HVAC systems with enhanced fresh air intake and modern filtration systems, JLL said. The firm also pointed to features such as touchless elevator controls, ultraviolet cleaning systems and other improvements that will make tenants feel safe.
“Even before the health and safety question, hot and cold issues are the biggest tenant complaint,” Greiner said, noting that more modern buildings have more energy-efficient and more controllable HVAC systems. Tenants have always inquired about the age of the system when considering a new building, but are now asking more nuanced questions about filtration, airflow and other issues that could impact the spread of the virus.
“There’s a lot of questions, but what we’re hearing from our tenants is that they’re concerned,” he said, later adding: “I think it’s going to be something that really gets addressed over the next six to nine months.”